The Irish retirement age will be raised to 66 in four years and eventually to 68 as part of reform of the pension system put forward in 'National Pension Framework,' a Government paper which was published on Wednesday, which also provides for the introduction of a new mandatory “auto-enrolment” pension for middle- and lower-income workers in the private sector, in 2014.
In the private sector, the document says overall, pension coverage has remained largely static since the previous coverage figures (Q4 2005). Coverage in Q1 2008 was at 54 per cent, down slightly from 55 per cent in Q4 2005 but up from 52 per cent in Q1 2002. The proposed reforms come at a time when politicians and other public sector staff have pensions that currently provide up to 70% of salary; are life-time linked to the the pay conditions of the last position before retirement and some grades such as Gardaí, can retire on full pension at 50. Besides, last summer, the McCarthy/Bord Snip report provided a raft of other cases such as judges who can retire on a full public pension even though they may have only a few years service in the public sector. Besides all that, in the Irish private sector, for those lucky to have an occupational pension, the guaranteed defined pension is increasingly an endangered species.
It is proposed that most workers aged over 22 will be automatically enrolled in a pension scheme which will provide additional retirement income on top of the State pension, unless they are already members of an occupational scheme. Employees will contribute 4 per cent of salary to the new defined-contribution scheme with employers paying 2 per cent and the State another 2 per cent. The Government has also undertaken to preserve the State pension at its present value of 35 per cent of average industrial earnings.
Lord Adair Turner, who is the current chairman of the UK's Financial Services Authority, said in Dublin in October 2006, that his Commission on Pensions in the UK had recommended a system which would automatically enrol employees in a pension from the time they began working unless they themselves choose to opt out of the scheme. This was necessary, he argued, because “a purely voluntary system was not going to work….employers won’t provide adequate pensions for employees and individuals won’t go out and buy pensions themselves.”
On Wednesday, Brendan McGinty of business group IBEC and Patricia Callan of its Small Firms' Association unit, both opposed mandatory pensions. They both have occupational pensions themselves, likely defined ones.
IBEC Director Brendan McGinty said:"Mandatory employer pension provision will fuel wage demands, particularly in labour intensive industries and small employers. These are businesses already struggling to survive.
"It makes sense to increase gradually the State retirement age in order to help ease the burden of providing pensions. IBEC supports a phased increase of retirement ages by voluntary agreement between employers and employees.
"Employers are struggling financially to provide defined benefit pensions. Market losses in 2008 were particularly savage and, together with having to provide for longer retirements, this has meant that the majority of defined benefit schemes are currently insolvent.
"IBEC welcomes the suggested changes to the funding standard. These may have merit providing they enable schemes to survive the current economic crisis.
"In relation to proposed tax relief changes, there is no evidence that a reduction in the personal tax relief on pension contributions would improve pension coverage for those on lower incomes. Tax relief on personal pension contributions should remain at the marginal tax rate."
The Director of the Small Firms Association, Patricia Callan said the introduction of mandatory pension provision, is premature and will prove costly to the Exchequer, to business, and to employees, without any associated benefits in the long-term. “Moving to mandatory pension provision at this time makes no sense, as we still have a comparatively young population in comparison to the rest of the EU, and have by no means exhausted the many opportunities still available to us to increase the success of voluntary schemes.”
She said the SFA is fundamentally opposed to the concept of mandatory pensions. “The cost of mandatory pension provision to the economy as a whole is clearly prohibitive. With small employers struggling to keep their doors open, and trying to reduce costs, it is unacceptable to impose an extra direct tax on labour for employers of 2%, and a potential additional 4% increase in the cost of labour, as employees traditionally demand to be compensated by their employers for any apparent reduction in their real take-home pay. With many employees already having less disposable income, due to reduction in working hours, basic pay rates and other remuneration benefits, the willingness of people to accept compulsory pension savings is seriously questionable. The Exchequer contribution also has to be funded by the tax-base, which is made up of business and employees, so they will effectively be hit twice. This proposal is simply unworkable”, concluded Callan.
The key elements of the new National Pensions Framework are:
The State pension will be reformed and will remain as the fundamental basis of the pension system in Ireland. Every effort will be made by the State to keep the value of this pension at 35% of average earnings;
A new supplementary pension scheme will be introduced to provide additional retirement income for employees who are not already in a pension scheme. Employees earning above a certain income threshold will be automatically enrolled in this new scheme, and the State and employer will support this by providing matching contributions;
There will be matching State and employer contributions. The State contribution will equal 33% tax relief - - the delivery mechanism for this to be decided;
The same matching State contribution (and delivery mechanism once decided) will apply to existing occupational and personal pension schemes and will replace the current system of tax relief at the standard and higher rates;
A new pension scheme for new entrants to the public service will take effect from 2010;
The age at which people qualify for the State Pension will be increased – to 66 years of age in 2014 , 67 in 2021 and 68 in 2028;
A revised and more secure defined benefit (DB) model is proposed which schemes may wish to consider if restructuring in the future.
The Minister for Social and Family Affairs, Mary Hanafin, said the new National Pensions Framework is the result of a comprehensive public consultation process that began with the publication of a Green Paper on Pensions in October 2007. Development of the Framework was also informed by the proposals in the Colm McCarthy's Bord Snip Report and the Report of the Commission on Taxation.
The Taoiseach Brian Cowen said that given the extent of the reforms outlined in the framework, the requirement for legislative amendments and the need to protect Ireland’s competitiveness, the changes will be phased in. While it is intended to introduce the new auto-enrolment scheme from 2014, the implementation date will be reviewed in light of economic conditions over the coming years. We are announcing the full framework today because we strongly believe that our strategic and long-term policies must be conveyed to all, to provide a clear statement of our intent and direction for the future” he said.